Coal divestment and the California insurance industry

California voters in 1988 dramatically expanded the power of the state Department of Insurance and turned the insurance commissioner post into an elected position. It also gave the commissioner unprecedented authority to prescribe which specific factors private insurance companies may use in crafting rates. The department already had the duty to monitor domestic companies’ financial solvency, in line with government’s traditional role in insurance to make sure companies have the wherewithal to pay their claims. Without this oversight, consumers face the risk of paying premiums without getting promised benefits in return.

Current California Insurance Commissioner Dave Jones, a former Democratic Assemblyman who was first elected to the post in 2010, has in recent months been accused of “bootstrapping” that reasonable authority into something much broader and more political. Nominally toward the goal of assuring insurance-company investments are sufficiently safe to ensure the companies’ long-term fiscal health, Jones has called for any insurers who write business in California to divest “voluntarily” from the bulk of their thermal-coal investments. He further has vowed to publicize the names of companies that don’t comply with this “voluntary” order, he noted in a January 2016 statement, “so that investors, policyholders, regulators and the general public can know the extent to which insurance companies are invested in the carbon economy.

California’s “Climate Risk Carbon Initiative” divestment request applies to direct investments – whether in the form of equity or fixed-income securities, like bonds – in companies that gain more than 30 percent of their revenues from thermal coal and to utilities that generate at least 30 percent of their energy from coal. It also requires insurance companies that do business in the state – even if they are domiciled elsewhere – to answer a variety of questions about such investments.

This data call will “evaluate the industry exposure as well as potential financial impact upon insurers as the (California Department of Insurance) performs its financial analysis and conducts financial examinations.” This will include “in-depth analysis and the valuation of the potential risk associated with these investments.”

An obvious question is raised as to whether this prescription really is about assuring the solvency of some of the most stable and conservative companies in the nation, or whether it serves primarily as an opportunity for an ambitious politician to champion a high-profile issue for long-term political gain. In announcing his recommendation, the commissioner described his rationale:

As utilities decrease their use of coal and other carbon fuel sources, as states like California limit the ability of the private sector to use coal and other carbon fuels for power generation and require their pension funds to divest from coal, as states like California and the United States impose more stringent air quality requirements which limit the ability to burn coal and other carbon fuels, and as nations across the world begin to implement the commitments they made to reduce their use of carbon at the recent United Nations COP21 Climate Summit in Paris, investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value.

Jones also cited his “statutory responsibility to make sure that insurance companies address potential financial risks in the reserves they hold to pay future claims.” But critics say the commissioner, who attended the Paris climate summit, is far afield from what the statute requires and deny that it gives him this expanded authority. Indeed, some question whether the recommendation itself might not needlessly create financial jitters by implying that stable companies have potential solvency issues. While regulations have made it harder to burn carbon-based fuels, and likely will grow more stringent in the future, such information already is broadly shared by investors and priced into the securities of affected industries that insurers might hold.

This isn’t the first time a politically ambitious California insurance regulator has sought to justify a divestment plan. While then-Insurance Commissioner Steve Poizner, a Republican, was running for governor in 2010, he floated a plan to force all insurers who operate in California to divest investments in any multinational companies that do business in Iran, deemed a sponsor of terrorism. After backing away, he declared “no investments that an insurer holds in any of those companies will be recognized on its financial statements in California.”

Some Iran-related disclosure rules are still on the books, even though the Obama administration has taken a somewhat different approach toward the Iranian regime. Such shifts in policy reinforce one of the key problems insurers have with divestment measures.

As is often the case, California is pioneering new ground with Jones’ policy. No other state has adopted it. It does, however, have a sympathetic audience in Washington State and among some members of the National Association of Insurance Commissioners, which has for several years debated whether to demand climate-risk surveys from insurers. As Insurance Journal explained in May 2016:

(Mike) Kreidler, the nation’s longest-serving insurance commissioner, chairs the National Association of Insurance Commissioners Climate Change and Global Working Group. He has for the past few years been calling out the insurance industry for being unprepared for climate change and has said insurers are not taking climate change seriously enough.

He and Jones have been the two leading voices for voluntary divestment.